Cellnex. Neutral. Q2 18 Increasing the M&A flexibility

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1 Cellnex 18 Increasing the M&A flexibility What s New: Cellnex has reported a reasonable set of results for, with group revenue and EBITDA in line with expectations. Broadcasting revenues remained under pressure (at -3.6% YoY, from -4.0% YoY in ), but Italian telecoms revenues grew strongly (at 5.7% YoY, from 0.8% YoY in ) driven in part by the materialisation of site demand from Iliad. The company s early adoption of IFRS reporting has given the illusion of an improved leverage position, which is likely to embolden Cellnex on to more acquisitions on the one-hand, but could also mean lower use of equity in any future M&A. Changes to estimates/ guidance: Cellnex has reiterated guidance for the year, which we think it remains on track to achieve: - EBITDA million euros, we are currently at the upper end of this at 4m - RLFCF to grow >10%, in line with our estimates - Dividend +10% for the full year 2018, in line with our estimates Changes to thesis: Cellnex continues to face headwinds in Spain as broadcasting and network service revenues remain under pressure. However, the outlook for Italy is more positive, where telecoms revenue will benefit from the deployment of Iliad s hybrid-mno network over the coming years. We are encouraged to see that organic PoP growth ticked up in as the Iliad sites started to materialise. The adoption of IFRS accounting standards has given Cellnex some headroom on leverage, bringing its net debt/ EBITDA down to 4.8x from 5.5x and comfortably below its self-imposed leverage ceiling of 6.5x. We think that this purely optical reduction in leverage (there is no change to underlying FCF) increases the likelihood of further acquisitions in the near-term. However, it reduces the risk that these will come at the cost of equity dilution as Cellnex keeps the same 6.5x leverage target. We are encouraged by the reported acquisition of XOC which should close in Q3. Whilst the scale of XOC s fibre network is small relative to Cellnex s site portfolio, we think that this exposure to fibre infrastructure build could lead Cellnex to invest in site backhaul upgrades over time, which would be accretive to value if correctly monetised. Valuation: We remain on a Neutral rating on Cellnex, with a target price of 22.8/share. At c..5x 2018 EV/EBITDA we think Cellnex looks fairly valued. We prefer Inwit due to its better exposure to the strong underlying trends in the Italian tower market. Neutral Ticker: CLNX SM Equity Target price, Euro : Potential Change: -3.3% James Ratzer (Analyst) james@newstreetresearch.com +44 (0) m 3m 12m Performance -3.3% 0.7% 12.0% 52wk high/low Market cap. ($bn) 5.8 No. Shares: 232 Avg daily trading volume ($m): Free Float %: 70.0% Valuation Summary Forecasts, Euro m E 2019E Revenue EBITDA EFCF/Share DPS Multiples EV/EBITDA 22.2x 19.2x.0x EV/FCF 56.0x 51.0x 56.1x P/E 9.6x 3.4x 93.5x Div Yield 0.4% 0.5% 0.5% Iliad drives Italy PoP growth higher in Organic annualised growth in PoPs % 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Q3 Q4 Q3 Q4 Spain Italy Both

2 1) numbers inline with consensus, guidance confirmed Group revenue in line with expectations at 222m (consensus: 220m, NSR: 226m), reflecting an acceleration in growth YoY to.6% (: 14.7%) as new sites from Bouygues and Sunrise came online. EBITDA was also in line with expectations at 103m (consensus: 103m, NSR: 102m). Regionally, Spanish revenue was broadly flat on the year. This was a modest improvement on recent quarters, but broadcasting and network services remain under pressure and the new revenues from the Masmovil sites haven t yet come on line. In Italy revenue growth accelerated to +5.7% YoY, vs. +0.8% in, as telecom site rental revenue picks up. Note that all number in the below table are on an IFRS 15 basis for comparability (Cellnex s audited results are now reported under IFRS ). Table 1: Cellnex reported results REVENUE Q3 Q Q3 Q Spain: Broadcast Infrastructure % -5.5% -4.0% -3.6% Spain: Telecom Site Rental % 5.4% 7.8% 8.6% Spain: Network Services & Others % -0.8% -2.8% -2.9% Total Spanish Revenues % -1.2% -0.1% 0.3% Total Italian Revenues % -0.5% 0.8% 5.7% Total Other European Revenues Group revenues % 13.9% 14.7%.6% EBITDA Adj Spanish EBITDA % -6.3% -1.2% -1.4% Spanish EBITDA margin 44% 42% 44% 44% Adj Italian EBITDA % 6.9% 10.0% 13.8% Italian EBITDA margin 38% 39% 41% 41% Adj Other Europe EBITDA 13 Other Europe EBITDA margin 76% 62% 71% 64% Group EBITDA %.0% 20.2% 21.7% The company reiterated full year guidance (FY EBITDA m, RLFCF +10%), although we had always though these estimates were conservative at the EBITDA level (we have FY18 EBITDA at 4m). 2

3 2) Change to IFRS accounting gives more The company reported on an IFRS basis for the first time this quarter. While IFRS reporting is not required until periods beginning on or after 1 January 2019, we believe Cellnex have adopted the standard early to improve the optics of their leverage position. IFRS has the effect of increasing the company s net debt (as future lease obligations are now recognised as a liability) but also increases EBITDA as annual lease costs are expensed as interest and depreciation (i.e. below the EBITDA line). Although this change makes no difference to their underlying cashflow position, it does change the optics of their leverage position with the company reporting that H1 net debt/ EBIDTA fell from 5.5x to 4.8x as a result of the change. Management were keen to stress that they believe this reporting gives a truer impression of their financial position, making their results more comparable with other tower companies that own the underlying land. Over the last three years, we estimate that IFRS reporting would have improved Cellnex s net debt/ EBITDA position by approximately one turn, and would expect a similar impact going forward. In estimating this number we have assumed that the of the capitalised lease obligation to annual lease expense remains constant over time. Table 2: Estimated impact of IFRS on net debt / EBITDA m E Revenue Operating expense Of which lease expense EBITDA EBITDA (IFRS ) Net debt ,499 2,237 2,392 Lease capitalisation (est.) Net debt / EBITDA Net debt / EBITDA (IFRS ) Cellnex had previously committed to keep net debt/ EBITDA below the 6.5x level. On this morning s call management were non-committal on whether this ceiling would change to reflect the new accounting standard, and we think that Cellnex is unlikely to now commit to a lower leverage ceiling. We therefore think it likely that leverage will increase in the medium term as Cellnex continues to expand through acquisitions. This will come as a relief for those investors concerned that future capital raises implied dilution. 3) Acquisition of XOC should drive revenue per site growth Cellnex reported the acquisition of Xarxa Oberta de Catalunya ( XOC ), a fibre optic infrastructure company with a concession to manage and construct a network in Catalonia until The transaction is valued at 34m and is expected to close in Q3. The company intends to provide fibre backhaul to its telecoms site in the areas covered by XOC s network, which they see as a means of increasing tenancy and revenue-per-tenant on these sites. Interestingly the need to provide fibre backhaul for a dense network of small cells was not a primary motivator for the transaction. We think this is an encouraging step for Cellnex, which currently owns few of the backhaul connections used by tenants of its sites in Spain. Whilst the number of sites that can be directly connected from XOC s network is likely to be small, this should to greater focus on fibre backhaul upgrades across Cellnex s site portfolio internationally. 3

4 Organic annualised growth in PoPs % Cellnex: Increasing the M&A flexibility 27 July 2018 In Italy, Inwit has had good success with driving incremental revenue from fibre backhaul upgrades, and now intends to upgrade a quarter of its copper backhaul connections to fibre by Based on the numbers reported by Inwit, we estimate that each of these fibre backhaul upgrades has an EV to Inwit of 32k and would expect the economics to be broadly similar for Cellnex. Table 3: EV of backhaul upgrade based on number reported by Inwit in Italy k Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Revenue increase Less: Capex OpFCF EV per backhaul upgrade ) Organic PoP growth accelerates in Italy Cellnex reported another quarter of site additions in both Spain and Italy (43 and 28 sites respectively), although the vast majority of these came from M&A rather than own-build. We continue to think that Cellnex is unlikely to see significant organic site build in these two markets; in Spain we see little appetite from operators (excl. Telefonica, who is catered for by Telxius) for expanding network coverage; and in Italy Cellnex s main customer (Wind-Tre) is preoccupied with their ongoing network consolidation. In Italy, organic PoP growth ticked up in as Cellnex started to see demand from Iliad. Iliad accounted for the majority of the 182 organic Italian PoP adds in the quarter, driving annualised organic growth to 6.5% from ~4% in the previous three quarters. Management reported that demand from Iliad was keeping their Italian operational team very busy, and we expect that to continue over the coming years as Iliad builds out its a hybrid- MNO network in urban areas. The framework contract that has been signed with Iliad does not contain any volume commitments, but we estimate that Iliad will deploy c.4k sites over the next five years, split between Cellnex and Inwit. Chart 1: Organic annualised growth in Spain and Italy 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Q3 Q4 Q3 Q Spain Italy Both. Excludes Masmovil sites acquisition. Inwit, which had its results earlier in the week, expects to sign a framework agreement with Iliad in early Q3. We also expect Inwit to see strong PoP growth from Iliad, as well as being exposed to expending site coverage from TI and Vodafone in Italy. We continue to prefer Inwit as a purer play on the Italian tower market. 4

5 Specialist sales: Charlie Gaynor Steven Perez Zach Monsma Michael Chambers Ethan Lacy Rating history Ratings % Buy %Neutral % Sell % last 12 months CNEX 0.0% 100.0% 0.0% % all stocks undercover 52.6% 37.2% 10.2% Full 12-month historical recommendation changes are available on request This report was produced by New Street Research LLP. 11 Austin Friars, London, EC2N 2HG Tel: New Street Research LLP is authorised and regulated in the UK by the Financial Conduct Authority and is registered in the United States with the Securities and Exchange Commission as an investment adviser. It may be distributed in the United States by New Street Research LLC which is a partner of New Street Research LLP. Regulatory Disclosures: This research is directed only at persons classified as Professional Clients under the rules of the Financial Conduct Authority ( FCA ), and must not be re-distributed to Retail Clients as defined in the rules of the FCA. This research is for our clients only. It is based on current public information which we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Most of our reports are published at irregular intervals as appropriate in the analyst's judgment. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. All our research reports are disseminated and available to all clients simultaneously through electronic publication to our website. Copyright 2018 New Street Research LLP No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of New Street Research LLP. 5